What: Shares of Vale SA (ADR) (NYSE:VALE) fell 25.6% in November. The vast majority of that drop came after Nov. 5, the day that two mining waste containment dams at Samarco iron-ore mine burst. Samarco is a Brazillian mine jointly owned by Vale and BHP Billiton (NYSE:BHP).
So what: The headline news that greets Vale's management team every morning hasn't gotten any better since Nov. 5. The social and environmental impact from the disaster has been huge, including damage to nearby towns and the deaths of a number of people. There have even been accusations from the UN that the waste that was released contained toxic materials. The full impact of this event is far from known at this point.
This is, of course, just the icing on the cake for a miner being hit hard by low commodity prices. Vale, for example, lost $0.19 a share in the third quarter, down from a profit of $0.13 a year ago. Still, there were key positives in the late October earnings release showing that Vale's progress in cutting costs and strengthening its financial position were taking hold and that, operationally, its business was continuing to run at the top of its game. But that's old news now and, frankly, doesn't mean all that much compared with the open-ended liability that's sitting on the horizon.
And it's already starting to get ugly. Although Vale and BHP are right to explain that the Samarco mine was operated as a separate company and thus the pair should be shielded from damages, that hasn't stopped Brazil from planning a big lawsuit. More suits are surely going to come, and the litigation will probably last for years. Since the full extent of the damage has yet to be determined, Vale is likely to feel the overhang of this event for a long time.
Now what: Vale isn't as strong financially as BHP, which helps explain why Vale fell a bit more than 25% on the Samarco news while BHP fell a little under 19%. Essentially, all of the work Vale has been doing to fortify its finances could be at risk. Most, if not all, investors should avoid Vale for now. Contrarians looking for opportunity in bad news, meanwhile, would probably be better served taking a deep dive into BHP's finances and future prospects.